MN Housing Board hears case for conduit bonds, learns agency risks

Board encourages agency to further investigate conduit bonds: will consider waiver in the future

The agency was approached by a developer for $30 million in bond authority that a city had originally issued, but, due to a clerical error, went back to Minnesota Housing on December 1.  At the time the clerical error was identified, the developer was close to closing and was slated to begin construction in March 2016. Because the project is a senior housing development, the developer cannot reapply to the city until May, delaying the project for five months. The developer has asked the agency to issue the bonds on behalf of the city so the project can break ground as scheduled.

The agency sought permission to move forward with exploring whether to serve as the conduit bond issuer to the project. Commissioner Tingerthal disclosed that serving as a conduit bond issuer does not expose the agency to financial risks if the project fails. Agency staff have reviewed the project’s financing and think the transaction is worthy.

The agency would require the developer to pay a modest fee to cover agency expenses related to reviewing the project but does not generate income from these transactions. Some board members asked what the public benefit of doing this versus other activities that the agency could expend similar energy and effort on.

The current board criteria require: (1) that the project be for preservation; (2) another entity cannot issue the bonds; (3) the agency has already been presented with the project and decided not to issue bonds; (4) a private debt agency must review the financials; and (5)  and the agency’s bond council must be utilized. The agency would need a waiver because this project is for new construction, the agency was not presented with the project earlier, and the agency would need to seek outside bond counsel as members of the agency’s bond counsel provided consultation to the original deal. In the past, the agency has issued conduit bonds but only when the agency has had other funds in the deal and was already monitoring the project.

Mary Tingerthal expressed a keen interest in being a conduit bond issuer to this project. The agency has looked at ways other than the 9 percent tax credit to do modest income senior housing. The developer’s financing model is similar to a model the agency is considering. This would give the agency experience with this new model. Also, the project uses a Freddie Mac tax exempt loan product which would eliminate the double step of originating tax exempt bonds and using loans to pay back the bond. This project would give the agency a chance to familiarize itself with this new Freddie Mac product.

The board expressed an interest if having staff move forward so it could consider a waiver in January. Board members were amenable to issuing a waiver before amending criteria.

New assessment helps agency mitigate risks

The agency periodical assesses risks to the agency to achieving its stated objectives outlined in the 2016-2019 Strategic Plan and 2016 Affordable Housing Plan. Eleven risk sources were assessed, and none received a Very High risk level ranking. Five risk sources received a High risk level ranking, a decrease from six last year. Interest rates were assessed as a High risk source due to continued interest rate volatility.  Interest rate management is a key activity for the agency.  The agency has operated in a low rate environment for many years, which has been stressful to the Agency’s business model. The low interest rate environment made it difficult for the agency to make money. The Commissioner addressed the impact to the loan pool from the Federal Reserve’s decision to raise interest rates. From the perspective of a financial institution, the increased interest rates are welcome. She said the agency is not at risk from increased interests rates but if borrowers’ incomes do not go up with interest rates, single family mortgage activities may see a slowdown. The Commissioner warned that if rates go up steeply, sales will go down among low income borrowers. She mentioned that with increased interest rates, the agency can take better advantage of tax exempt bonds. Another source of high risk discussed was counterparties. As single family mortgage activities are in limbo due to new regulations, the agency is investigating if it should provide mortgage loan servicing differently.

Bridges rental assistance to serve more areas of the state

The board approved the agency’s request for $1.016 million to expand two existing grants and add five new grants and serve 102 new households. Agency staff told the board that the funding would help the agency to implement the State’s Olmstead Plan and Plan to Prevent Homelessness. Cass Country HRA for Hubbard County, Cloquet HRA, and Red Wing HRA have been selected as new grantees in service areas previously unserved. Mental Health Resources, an existing Bridges administrator, was selected to operate two new grants for Dakota and Ramsey counties, designated areas of high need.  The agency selected St. Cloud HRA to restore vouchers that were funded in 2014. The agency will partially fund the Metro HRA request, an expansion of an existing grant serving Hennepin, Ramsey and Anoka counties.

Housing Trust Fund grants expanded to serve highly mobile students

The board approved a request to use $2 million from the Housing Trust Fund (HTF) to modify existing rental assistance grants and enter into grant agreements with Clay County HRA, Project for Pride in Living, and Amherst H. Wilder to provide funds for short term rental assistance programs for homeless and highly mobile families with at least one child in grades K-12. Staff requested an additional $185,000 to expand grants to the three organizations to continue serving 89 families still receiving assistance and an additional $1.8 million in grant funds to expand services to 83 new households. This funding was appropriated to the pilot by the legislature last spring.  According to Commissioner Mary Tingerthal, this program has helped bridge connections between schools and available housing. Minnesota Housing and the Department of Education are required to submit a report to the legislature in 2017. Both agencies will work together to share data.

Agency reduces Mortgage Credit Certificate (MCC) rate to serve more families

The board approved two amendments related to the AHP.  First, the board approved a staff request for a $10 million increase to the amount of bonding authority to be converted to the MCC program. Second, the board approved the staff recommendation that the MCC credit rate reduce from 35 percent to 25 percent.  By increasing authority from $40 million to $50 million and lowering the credit rate, the Agency hopes to run a continuous program through February 2017 and avoid having to end and restart the program. Staff requested the change because the agency is currently at risk of running out of money before its plan to end the program in 2017. Under IRS requirements, 20 percent of funds have to be set aside for Targeted Areas census tracts.  Without increased funds, the agency projects running out of non-targeted set aside funds by summer 2016, at which time the program would have to stop and restart. The agency is seeing more production in non-Targeted Areas than it originally projected. Agency staff believes the requests approved by the board will stretch the allocation. A 35 percent credit rate was determined earlier in order to realize savings in a low interest rate market and a depressed economy. Now that the Federal Reserve has increased interest rates, borrowers can still realize savings and better address racial and ethnic homeownership disparities by serving more families. The additional funds also allows the agency to maximize all bonding authority converted and not let funds go unused.

Status report on Enhanced Financial Capacity Homeownership Initiative

The agency provided a status update on the summary of intake data and outcomes from the first year of the Enhanced Financial Capacity Homeownersip Initiative. The program’s first year was funded at $650,000.  The program reached 99% of its original goal. The agency has served 551 clients, 92 percent of whom are households of color and 76 percent of whom are below 80 percent area median income (AMI), and 72 percent of whom identified credit as the primary barrier to obtaining homeownership.  194 clients have exited the program. Of that, 43 percent of clients have purchased new homes, 3 percent are actively pursuing homeownership, 16 percent are still interested but not at this time and 13 percent are no longer interested. In the second program year, also funded at $650,000, the agency plans to enroll 580 clients into the program.